Internationally marketed local-currency issuance has become the latest twist to a booming emerging market bond market. Russian and Turkish banks and corporates are playing a leading role, issuing new Euroclearable, foreign-law bonds in roubles and Turkish liras.
Akbank became the first Turkish firm to issue in the market in late January, raising TL1 billion ($532 million) of five-year money. Turkey’s debut Eurolira bond priced at 7.5%. Arrangers Bank of America Merrill Lynch, Deutsche Bank, Citi and HSBC saw only 1% allocated to domestic buyers.
|Kerim Rota, head of treasury at Akbank|
Behind this is a booming Turkish economy, driven by a mostly lira-denominated banking sector, while local wholesale funding provides only short-term funds. Russia’s Sberbank, which completed its acquisition of Turkish lender Denizbank last year, was in the market for a Eurolira deal in late February, and Rota is not the only one to expect more Turkish banks to follow.
Meanwhile, by late February, Eurorouble issuance in 2013 had totalled the equivalent of $3.2 billion, already comfortably surpassing 2012 volumes. The six Eurorouble deals issued in 2013, all by Russian firms, have also brought total outstanding Eurorouble issuance to roughly double the volume of outstanding issuance this time last year.
Sign of potential
Eurorouble issuers in January included state-backed issuers Gazprombank, Housing Mortgage Lending, Russian Agricultural Bank, and Sberbank. In mid-February, private gas firm Novatek, rated investment grade, issued a R14 billion ($470 million) 144a/RegS four-year deal. Russian investors bought 45%.
Also in February, and in a sign of just how far the market could go if the rouble proves relatively stable, sub-investment-grade Vimpelcom, a privately owned telecoms firm, raised R12 billion in Euroclearable five-year money in a 144a format, priced at 9%. One banker says he has also had enquiries and is assessing appetite around potential Eurozloty deals.
"Offshore rouble bonds this year are another aspect of the wider investor trend towards emerging markets becoming mainstream," says Martin Hibbert, head of CEEMEA bond origination at Deutsche Bank. "This is not the quirky asset class it was in previous years, which would suggest the recent rise of local-currency Eurobond issuance in Russia and Turkey is not evidence of an emerging market bubble."
Emerging Europe has not been the only region to see more local-currency Eurobonds. These deals are less relevant to Middle East issuers, as most Arab Gulf currencies are pegged to the dollar. But in Colombia, Empresa de Telecomunicaciones de Bogotá priced a $300 million-equivalent 144a peso deal in January, for example.
Overall, portfolio investors have continued to switch to emerging market assets in the first part of 2012 and research from Deutsche Bank reckons the flows will continue given the systemic financial stability enjoyed by bigger emerging economies. According to Dealogic, internationally marketed debt issuance from emerging Europe has broken its 2010 record for volume in the first six weeks of the year.
Stream not flood
Nick Darrant, head of CEEMEA syndicate at BNP Paribas, expresses a consensus view when he says he expects "a stream not a flood" of Eurolira or Eurorouble deals. "The deepest pool of capital in the Eurobond market is still in hard currency," says Darrant.
Darrant says local-currency Eurobonds will likely be mostly restricted to bigger markets, such as Turkey and especially Russia – those with a wider range of more frequent issuers. Nevertheless, he acknowledges that the low yields in hard-currency emerging market Eurobonds are driving more international investors into local-currency paper.
Expectation of near-term appreciation of the rouble has been another driver of the trend. Also, as in Turkey, there are expectations of a lower central bank rate environment in Russia, even as there have been signs of US rates rising.
The liberalization of Russia’s local-currency government debt market is one reason for bullishness on the rouble, according to Vladimir Kolychev, chief economist of Rosbank (part of Société Générale). Euroclear began settlement of all rouble-denominated federal government bonds in February, although few expect this to be extended imminently to corporate debt.
In Turkey, says Rota, Fitch’s upgrade of its rating of Turkish government debt to triple-B minus late last year has helped pave the way for Eurorouble deals, driving down Turkish bond yields. He says the emergence of a foreign-currency Eurobond market for Turkish issuers over the past two years has further prepared the market for offshore local-currency bonds.